United Company Limited has a successful chain of family restaurants which are located in the suburban areas. The decision taken many years ago to focus on the suburban locations due to high rental cost in the Central Business District (CBD) has paid off with United enjoying earnings and revenue growth which exceeded the industry average.
However in the last few years, rental rates in the suburban areas have increased by more than three-fold. United is now considering whether it should purchase its own properties to operate its restaurants. As a first foray into property, it is considering buying an entire building and lease out the space it does not need to cafes, themed restaurants, and a supermarket.
United is currently equity financed with a cash reserve of $20 million. The finance director has done some calculations and believes that raising $150 million through a 10-year bond issue at 4 percent coupon would be adequate to meet investors' required rate of return.
Commercial property prices have been increasing steadily for the past decade with greater price appreciation in the last few years, and this is expected to continue.
Required:
Prepare a report for the board of directors. In the report, discuss the proposal, including the theoretical arguments and the practical considerations.
Total 1750 words , You are required to consult and fully reference a MINIMUM of 5 references from 3 different sources.